People like to chase the hottest tickers. It’s human nature. When a tech stock goes on what seems like an unstoppable rally, the fear-of-missing-out (FOMO) mentality leads plenty of investors to buy at all-time highs.
The best opportunity, though, could be in the pullbacks. Think about it: if you have strong convictions about the long-term potential of a company, and its stock price goes down on some news, wouldn’t it be nice to get some shares at a discount?
And that, my dear reader, is why Netflix Inc (NASDAQ:NFLX) deserves attention right now.
Netflix stock was one of the best-performing tech stocks of the last decade. The company has built a huge presence in the on-demand video streaming industry, and it was instrumental in the shift of consumers moving from cable TV to on-demand viewing.
When Netflix Inc reported its fourth-quarter 2020 financial results in January 2021, its stock gapped up on the news. But as we can see from the below chart, NFLX stock wasn’t able to maintain that upward momentum. It later filled that gap and began consolidating.
Netflix recently reported earnings again—and the stock gapped again. This time it was a gap to the downside.
Netflix Inc (NASDAQ:NFLX) Stock Chart
Chart courtesy of StockCharts.com
The reason behind the sudden drop in the Netflix stock price likely had to do with subscriber growth. On average, Wall Street analysts expected the company to add 6.2 million paid net subscribers in the first quarter of 2021. The actual number turned out to be less than 4.0 million. (Source: “Letter to Shareholders,” Netflix Inc, April 20, 2021.)
However, the other numbers from the earnings report weren’t bad at all. In the first quarter, Netflix generated $7.16 billion of revenue, which represented a 24% increase year-over-year and an eight percent increase sequentially. The top-line number outperformed Wall Street’s expectation of $7.13 billion in revenue.
In the quarter, Netflix Inc earned net income of $1.7 billion, or $3.75 per share, which more than doubled the $709.0 million, or $1.57 per share, earned in the year-ago period. Wall Street, on the other hand, expected the company to turn a profit of $2.97 per share.
In other words, this fast-growing company—whose share price dropped 7.4% in the trading session following its latest earnings report—actually beat both top- and bottom-line expectations from Wall Street.
And while subscriber growth was weaker than what analysts expected, there was, in fact, growth. As mentioned earlier, Netflix Inc added nearly four million paid net subscribers. That brought the company’s total paid memberships to 208 million at the end of the first quarter.
The COVID-19 pandemic, which resulted in strong growth for the on-demand video streaming industry last year, might have caused some headwinds for Netflix in the reporting quarter.
In a letter to shareholders, the company said, “We believe paid membership growth slowed due to the big Covid-19 pull forward in 2020 and a lighter content slate in the first half of this year, due to Covid-19 production delays.” (Source: Ibid.)
But the delay in new content means the best is likely yet to come. Netflix Inc added that “the production delays from Covid-19 in 2020 will lead to a 2021 slate that is more heavily second half weighted with a large number of returning franchises.” (Source: Ibid.)
Of course, competition could remain a concern for NFLX stock investors. After all, while the company has enjoyed a first-mover advantage, other services—such as Walt Disney Co’s (NYSE:DIS) “Disney+,” Amazon.com, Inc.’s (NASDAQ:AMZN) “Amazon Prime Video,” and AT&T Inc.’s (NYSE:T) “HBO Max”—have been gaining momentum.
Regarding the competition, my view is that there are two ways this could play out. The first is that one company will outgrow the others and dominate the industry. The second is that viewers won’t mind having multiple subscriptions, and that streaming providers will continue to grow as a group.
Given that most of the subscriptions cost less than $15.00 a month, and each of them has unique content appeal, I’d say the second scenario looks more likely. In other words, the trend continues to be streaming vs. cable rather than Netflix vs. Disney+.
Last but certainly not least, Netflix Inc returns cash to investors. The company recently announced a $5.0-billion share repurchase program that’s expected to start in the current quarter with no fixed expiration date.
In an industry where companies have to invest a lot of capital for new content, the fact that Netflix can return cash to investors should be seen as a sign of strength.
Ultimately, investor sentiment is hard to predict, and Netflix stock could be consolidating for a while.
But for investors who believe in the future of this growing streaming play, NFLX stock’s post-earnings pullback could represent an opportunity.